How About What Not To Do With 401(K) Contributions

Avoid these 401(k) blunders and you just might make it to retirement with more money.

With the slow, sad demise of the pension plan, 401(k) plans have become an important part of the American retirement system. At last count, around 52 million of us were actively participating in one, with a collective $4.4 trillion in assets. Not only that, but the total number of 401(k) plan assets grows every year.¹

Image courtesy ici.org

Image courtesy ici.org

But, while that looks good on paper since it's always better when we're saving for retirement, there's one problem. Too many people are making mistakes with their 401(k) plans. The result? That $4.4 trillion in assets is falling short of potential.

To help you get the most out of your plan, here's what not to do.

Making 401(k) Contributions? Here's What Not to Do

1. Don't Be Lazy With the Options

You may think you're ahead of the game just because you're enrolled in a 401(k) at work. Truth be told: you are. However, that doesn't mean you should just go with the default investment options your employer has chosen for you.

It's to your advantage to explore your options here, even if it seems a little daunting at first. You research lots of major purchases in life: why not your retirement funds as well?

Want a shortcut? Over time, mutual funds (with low costs) have, historically, usually performed better than funds with higher costs. Vanguard explores this in depth and even offers a catchy slogan for the concept:

"Markets are unpredictable. Costs are forever."

-Vanguard

Lots of people stick with default investment options because they don't know how to assess their options. Yes, it's confusing but you do have options so there's no need to sheepishly follow what's been set as a default by your employer.

If you're not sure what to do, just pick a Target Retirement Fund. These are designed to change over time as you get closer to retirement. You pick your retirement year, and the fund allocates a mix that's appropriate for you. These are usually index funds, so you get a broad mix.

You can also seek advice from a financial planner, or try reading some books on investment. A little knowledge (or advice) goes a long way in this situation.

2. Don't Buy (too much) Company Stock

Your livelihood is pinned to the company you work for. If they do well, you're OK. But if they falter, your job is at risk. When you invest in company stock through your 401(k), now you're also tying your retirement to how well your company is doing. That's just too much risk all in one place.

3. Don't Ignore Fees

If you remember back to the day you enrolled in your company's 401(k) plan, you might recall a very long list of fund choices. Many on that list were probably similar, but with varying expense ratios (the amount you're charged annually for having your funds managed for you).

You might see some with a fee as low as 0.10% while others might be as high as 1.50%. While both of those numbers are relatively low in the grand scheme of things, the difference in fees over time could will be enormous.

4. Don't Put Your 401(k) in Cash or a Money Market Account

Investing in cash or a money market account may feel safe, but when you do this, you're simply being too conservative for your own good. These types of funds exist so people have a way to diversify and as a way to keep funds liquid, but again, you're short-changing your own retirement savings by missing out on higher returns. There is a place for having cash as part of your overall plan, but having cash in your 401(k) is not how you grow your net worth over time.

References

1.Frequently Asked Questions About 401(k) Plans. Investment Company Institute. Retrieved 11/19/2016 from https://www.ici.org/policy/retirement/plan/401k/faqs_401k